How do you calculate the annualized cost of a discount?
The formula is: annualized cost = [discount % ÷ (100% − discount %)] × [360 ÷ (full term − discount period)]. For 2/10 net 30, the buyer forgoes the discount for 20 extra days (30 − 10) to keep 98% of the invoice value instead of paying 98% ten days earlier: (2 ÷ 98) × (360 ÷ 20) = 0.0204 × 18 = 36.7%. That is the implied interest rate for choosing not to pay early.
What do common discount terms cost, annualized?
| Terms | Annualized cost | When it makes sense |
|---|---|---|
| 1/10 net 30 | 18.2% | Only if your cost of borrowing is above ~18% — rare for most businesses. |
| 2/10 net 30 | 36.7% | Almost never worth foregoing if you can borrow or collect for less than 36.7%. |
| 3/10 net 30 | 55.7% | The discount is expensive to offer and expensive to skip — reconsider the terms entirely. |
| 2/10 net 60 | 14.7% | A longer base term lowers the annualized cost — closer to a reasonable financing rate. |
| 1/10 net 60 | 7.3% | Cheap enough that a customer with access to a bank line should take it. |
| 2/15 net 45 | 24.5% | Moderate — worth comparing against your actual cost of capital before deciding. |
Are early payment discounts worth offering?
As a seller, an early payment discount is a way to buy speed with margin. Offering 2/10 net 30 on every invoice paid early costs you 2% of revenue on those invoices — which annualizes to a 36.7% financing rate if you think of it as the price of getting paid 20 days sooner. That is expensive compared to most credit lines, factoring arrangements, or simply collecting on time.
The cheaper alternative for most businesses is tightening collection instead of discounting it away: a disciplined reminder schedule costs a small flat fee and moves payment dates forward without giving up any margin. Reserve discounts for customers with genuine leverage (large accounts, competitive bids) rather than offering them by default.
As a buyer, the math runs the other way: take the discount whenever your cost of capital is below the annualized rate in the table above. At 2/10 net 30, that is a low bar — most businesses with cash on hand should take it.